Even a slowing China is oil’s best defence against deeper slump
September 20 2015 09:04 PM
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Bloomberg
London


Even after China’s slowing economy dragged crude to a six-year low, oil’s second-biggest consumer remains the main safeguard against a further price meltdown.
While China’s surprise currency devaluation helped trigger Brent crude’s slump to about $42 a barrel last month, the nation’s stockpiling of oil can staunch further losses.
In the first seven months of the year, China purchased about half a million barrels of crude in excess of its daily needs, the most for the period since 2012, according to data compiled by Bloomberg. As the country gathers bargain barrels for its strategic petroleum reserve, the demand is cushioning an oversupplied market from a further crash, according to Columbia University’s Center on Global Energy Policy.
“It throws a lifeline to the market” that safeguards against the risk of crude touching $20 a barrel, Jeff Currie, head of commodities research at Goldman Sachs Group Inc in New York, said by phone. “That lifeline lasts through late 2016.”
Other countries have emergency oil-supply buffers, and while the US Strategic Petroleum Reserve has been stable at about 700mn barrels for years, China is expanding its stockpiles rapidly.
The Asian nation has accumulated about 200mn barrels of crude in its reserve so far and aims to have 500mn by the end of the decade, according to the International Energy Agency. It’s currently filling a 19mn-barrel facility at Huangdao and will add oil at six sites with a combined capacity of about 132mn barrels over the next 18 months, the Paris- based adviser on energy policy estimates.
“The fact that China is stockpiling crude for public strategic storage certainly offsets the weaker sentiment on China’s oil-product demand,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London.
China’s demand growth is set to slow to an annual rate of 2.3% by the fourth quarter compared with 5.6% in the second quarter, a reflection of “weak car sales data, declines in industrial activity, plummeting property prices and fragile electricity output,” the IEA said in a report on September 11.
Brent, the international oil benchmark, has fallen about 50% in the past year.
When amassing inventories, China’s import demand can swing by as much as 1mn bpd, or about 15% above monthly average levels, said Colin Fenton, a fellow at the Center on Global Energy Policy at Columbia University in New York. Because the country buys when prices dip, it helps shield crude against extreme losses and effectively makes $30 a floor for Brent, he said by e-mail.
“It’s going to be really, really hard to stay there or push lower because that price has already been demonstrated by the Chinese to be one where you should expect hundreds of thousands of barrels per day of import demand to appear,” said Fenton, who was global head of commodities research at JPMorgan Chase & Co from 2010 to 2015. “China is the only country that can do it.”
These discretionary purchases, while tempering oil’s recent slump, still need to be considered against the long-term slowdown in China’s energy consumption and the size of the current oversupply of crude, according to Barclays.
“The surplus in the market at the moment is close to 2mn bpd,” said Miswin Mahesh, an analyst at Barclays in London. “China’s support for the SPR would only be able to take a fraction out of that.”
While Chinese stockpiling will “taper off” in 2016, it’s helping the oil market to digest excess production gradually, according to Goldman Sachs’s Currie.
By mopping up some of the surplus, China encourages a gentler scenario in which the “financial stress” of $40 oil gradually causes highly indebted shale producers to curb production, Currie said. “You reduce the likelihood of a scenario where the market only balances when prices collapse below production costs, at about $20 a barrel,” he said.

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